Laboreconomics seeks to understand the functioning of the labor market. Labor markets function through the interaction of workers and employers.

The overall labour market differs from markets for goods in several ways. Perhaps the most important of these differences is the function of supply and demand in setting prices. In markets for goods, if the price is high there is a tendancy in the long run for more goods to be produced until the demand is satisfied. With labour, overall supply can't effectively be manufactured because people have a limited amount of time in the day, and people aren't manufactured. A rise in overall wages will not generally result in more supply of labour - it may result in less supply of labour as workers take more time off to spend their increased wages, or it may result in no change in supply if workers on average decide to save their increased pay. It is difficult to see how it would increase the supply. Within the overall labour market, particular labour markets are thought to be subject to more normal rules of supply and demand as workers are attracted to change job types in response to differing wages.

Many economists have thought that, in the absence of laws or organisations such as unions to the interferre, labor markets can be close to perfectly competitive in the economic sense - that is, there are many workers and employers both having perfect information about each other and there are no transaction costs. The competitive assumption leads to clear conclusions - workers earn their marginal product of labor.